Would the investment decision be the same based on IRR approach Explain

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Strategic Financial Management
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Strategic Financial Management
1. Bajaj Limited expects to see a growth of 20% every year in free cash flow to equity
(FCFE) over the next 3 years. The growth is likely to decline to 10% over the subsequent
two years. After that, it is expected to be at a stable level of 6% per year. The FCFE in
the current year is Rs 20 per equity share. Compute the fair value per share based on
the FCFE approach. Assume 20% cost of equity. (10 Marks)
2. Companies X and Y are into the same business with different capital structures.
Calculate the weighted average cost of capital of X and Y. Assume income tax rate of
30%. (10 Marks)
3. A manufacturer is exploring a proposed production of premium quality widgets. The
required machine would cost Rs 2 lakhs and has a useful life of 5 years. For the purpose
of tax, relevant depreciation allowed on the machine is 20 percent on written down
value basis. The salvage value is realizable at the end of 5 years. Initial working capital
required is Rs 100,000 and is expected to remain constant year on year.
Widgets can be sold at Rs 8 each. Around 75,000 widgets can be sold per year. A cash
fixed cost of Rs 50,000 is expected to be incurred every year. Variable cost is estimated
to be Rs 4 per widget. The tax rate is 30%. Assume 20% cost of capital.
(a) Evaluate the proposal based on its NPV. (5 Marks)
(b) Would the investment decision be the same based on IRR approach? Explain. (5 Marks)
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